Two colleagues are discussing data with the document data

Why HR insights are critical to the success of an M&A transaction

Why is it critical to include HR competence and insights throughout the whole process for any M&A transaction?

In brief:

  • Some of the most common reasons why M&As fail lies within the HR domain.
  • We observe the lack of sufficient HR involvement across the M&A process in three core areas.
  • By closing these competency gaps, organizations can be better positioned to succeed with their M&As.

The requirements and risks involved in mergers and acquisitions (M&A) for organizations are still huge, despite more than 100 years’ worth of accumulated M&A transaction knowledge. The most common reasons why M&As fail originate in the HR domain and are driven by cultural and leadership styles, employee engagement, talent retention, and total rewards. As pointed out by EY thought leaders in the past, placing humans at the center can double transformational success.

In this article, we explore why it is critical to include HR competence and insights throughout the whole M&A transaction process. We draw upon our observations that include some of the most common HR “gaps” and misalignments.

In particular, we highlight three central gaps that organizations must bridge from an HR perspective, to conduct successful M&A transactions.

Related articles

    Gap no. 1: target ideation and business case

    Assessing different acquisition options and ensuring they are underpinned by realistic people assumptions are complex tasks that require broad and deep HR competence. While the deal teams we have seen consist of strong profiles within areas such as investing, strategy and law, we often see an HR competency gap within them. With cross-functional competency and end-to-end expertise, the deal team will be better equipped to identify and account for key HR dependencies. This will, in turn, drive a more agile and focused targeting process and improve the quality of the early business case assessments.
     

    Gap no. 2: due diligence

    This stage involves determining the buyers’ “acquire vs. not acquire” decision and the price they are willing to pay for the target. The responsibility of HR in this stage cannot be underestimated. Regrettably, this responsibility is often overshadowed as buyers scope the HR due diligence too narrowly, focusing solely on people risk and liabilities — such as pension liabilities or harassment litigations — while neglecting other HR areas that are critical to this stage. In the worst case, this neglect may lead to an M&A failure at some point after signing the deal.

    More commonly, weak or unrealistic people assumptions impair the forecasting accuracy of synergies intended with the deal — both the value and time to realization. Attention needs to be paid to what is “critically” needed to assess the future success of the M&A transaction and the price for the target. What is not critical can be addressed after signing the deal.

    Below are a few examples from some of the other critical areas where most buyers tend to make misjudged assumptions rather than getting fact-based insights through HR due diligence. The buyer assumes that:

    • Differences in culture and leadership styles between the buyer and the target are too small to create organizational inefficiencies or challenge the realization of the vision and synergies intended with the deal
    • Key employees will stay aboard and no actual flight-risk and impact assessment is needed
    • Employee engagement will remain unchanged and will not impact productivity or sales negatively
    • The target has a pool of highly skilled employees with the critically needed competency of X or Y
    • Total rewards packages can be easily harmonized without increasing attrition or cost
    • HR functions and technologies can be quickly and cheaply harmonized
    • All potential people and organization-related synergies have already been identified

    Gap no. 3: integration agility

    In the case of post-merger integration (PMI), we often see two issues emerging from an HR perspective:

    • The planning and execution start too late.
    • The process is too fixed and sequential.

    We believe that organizations would be well-advised to frontload knowledge both before and during the PMI process, to ensure higher odds of succeeding with seamless integration.

    The PMI planning should start well before signing the deal. The insights collected through well-executed HR due diligence are a good starting point. For instance, mapping potential cultural differences in the due diligence phase will provide significant insights that can be leveraged during PMI planning for change management and employee engagement. Another example is the key employee attrition risk. If assessed in the due diligence phase, effective strategies can be initiated in the very early stage of the PMI, mitigating attrition.

    Finally, understanding the HR function’s maturity in the due diligence phase will provide a reasonable understanding of the transformation journey required to establish a joint HR function and associated people services. HR technology and data quality are pivotal drivers impacting lead time to integrations and synergy realization.

    With regards to PMI being too fixed and sequential, we have found that using an agile approach often improves the odds of success. For instance, PMIs executed with an “integrate everything at once!” mindset involves the risk of destabilizing operations and revenue flows in a new, joint organization. A staggered approach is often better. Promptly integrate support functions, but allow more quality planning time for the integration of the core functions to avoid disruptions and allow for seamless integration.

    Another agile approach is to tailor the change journey to different employee segments — such as key employees — to shorten the employee “resistance curve” as much as possible. One final example is leveraging available employee data and analytics to enable near real-time visibility, feedback and decision-making, hence continuously adjusting the change management approach. The recent digital boom has changed the change management landscape. It is now easier than ever before to apply agile principles in large transformations.

    By closing these three HR competency gaps, we believe that organizations will be better positioned to succeed with their inorganic growth ambitions.

    This article was authored by Alexander Olzen and Michael Solstad

    Summary

    The requirements and risks for organizations to grow through Mergers and Acquisitions (M&A) are still huge despite more than 100 years of accumulated M&A transaction knowledge to draw upon. Some of the most common reasons that M&As fail originate in the HR domain — culture and leadership styles, employee engagement, talent retention, and total rewards, etc. It is critical to include HR competence and insights throughout the whole process of any M&A transaction.

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.